The Economic Crime (Transparency and Enforcement) Act 2022 came into force on 1 August 2022 and introduced a requirement for all overseas entities that own property in the UK to record information about themselves and their beneficial owners on a new register at Companies House by 31 January 2023.
For law firms advising such entities, great care must be taken both to ensure compliance, and to anticipate the increased claims risk where clients fail to meet the deadline.
In search of transparency
The new Act introduced a new Register of Overseas Entities (ROE), designed to increase transparency around who owns or controls overseas entities owning property in the UK.
This register applies to entities not governed by UK law, which own land or property in the UK, known as a ‘Qualifying Estate’, and requires such entities to disclose details of itself and its property transactions, including details of any beneficial ownership.
Broadly speaking, this means submitting information about anyone with more than a 25% share or voting right in the entity, or who are otherwise in a position of significant influence or control.
Entities must also provide evidence of verification of identity. Those permitted to undertake such verification are UK-based agents supervised under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and includes solicitors.
The deadline for registration falls on 31 January 2023. Entities that fail to register by that date will find themselves unable to buy, sell, transfer, lease or charge property or land in the UK until they are registered.
An entity’s failure to comply with the rules will also be punishable by fines, or imprisonment of its directors.
Solicitors must get up to speed
In particular, the introduction of the verification process presents significant risk for solicitors who fail to get up to speed with the new rules.
As above, failure by a client to register in the ROE could mean that the client is unable to dispose of (or deal effectively with) property. Where such failure was caused by a solicitor’s advice (or lack thereof) the client could make a claim against that solicitor for the financial loss suffered as a result.
There might also be a risk of claims for loss of a chance, or the loss of a potential profit, on a property transaction where a solicitor fails to verify beneficial owners.
The requirement in the Act to update the register annually could also result in claims, if solicitors fail to advise clients of the need for updates, or if it is not made clear in the scope of work in the letter of engagement whether such updates will be dealt with by the firm.
Solicitors may also be at risk of claims from lenders. The impact of the new rules on securities over property held by overseas entities may see lenders review their existing portfolios (as well as their back book, given that the Act has retrospective effect), and take steps to ensure borrowers are properly registered.
This could potentially result in claims against solicitors if they have failed to ensure compliance.
In addition, solicitors may be exposed to criminal and regulatory proceedings where they fail to comply with the strict requirements of the verification process, so great care should be taken in this regard.
Proceed with caution
If they haven’t already, law firms must quickly get to grips with the requirement to register beneficial owners and should review the legislation thoroughly and make appropriate arrangements for how they intend to deal with the changes.
Overseas entities may now find that they are unable to register in time to meet the deadline and solicitors might sensibly choose to not take on potential liabilities by declining any last-minute instructions to complete ROE verification processes.
Solicitors might be interested to note that the Law Society of England & Wales’s guidance on ROE states: “We anticipate that many firms will conclude that they are unable or unwilling to conduct ROE verification.”
It is worth noting that the steps to be taken for overseas entity verification go beyond what solicitors may be used to in relation to anti-money laundering (AML) requirements, so it is not simply a case of replicating the checks already carried out.
As existing property registration processes are usually completed by solicitors, there might be an expectation on the part of clients that the solicitor will deal with ROE requirements too. Some firms currently offer a corporate director or trustee service, and they may decide to include this verification process as part of their offering.
As always, effective client communication will be critical – a law firm will need to be clear about whether it will carry out the ROE verification process, what it will need from the client in order to do so and what it will charge.
Law firms seeking to offer ROE verification services would also be wise to check this with their professional indemnity insurance (PII) providers. Insurers may consider the risk is too onerous, and will want to be satisfied that a firm has adequate systems and processes to undertake this work.
Heightened risk is here to stay
Firms should also consider the requirement for annual updates to the ROE, and consider whether they are prepared to take on the responsibility of diarising and complying with that requirement. Where firms are not prepared to take that on, they should consider explaining that position clearly to the client and explicitly exclude such updates from the scope of work in the letter of engagement.
Regardless of the area of practice, firms will need to keep up to date with how the changes might affect their clients. In all cases, firms should be clear with their clients about the scope of a piece of work and whether that includes ROE verification.
Above all, caution should be exercised before a firm chooses to carry out verification, and the circumstances of each request should be considered individually.
For further information, please contact:
Matthew Thomson, Client Executive
T: 0770 918 9572